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Michigan CLASS poised to take advantage of rising rates…
It’s a great time to be a Michigan CLASS Participant as we are experiencing the first rising interest rate environment in nearly a decade. The Fed began by raising historically low interest rates for the first time in December of 2015. Then a year later, the Fed did it again with another 25-basis point increase in December of 2016. Now in 2017, the FOMC raised rates for the third time at their meeting on March 15 indicating that the economy is staying on track. So, what does this mean for Michigan CLASS Participants?
What this means is that after years of historically low rates and declining investment income, Michigan public sector investors have a reason to be optimistic. As rates continue to rise, short-term investment pool yields are likely to see continued increases due to the short-term nature of the securities held within their respective portfolios. Alternatively, longer-term portfolios are unlikely to reap the immediate benefits of these short-term interest rate hikes.
To better explain how this works, consider the differences between a local government investment pool (LGIP) with a weighted average maturity (WAM) of 60 days versus a portfolio of securities with a duration of 1 year. An LGIP like Michigan CLASS has the ability to capitalize on rising rates as funds can be reinvested at a quicker pace. The shorter the maturity or duration of a bond, the less susceptible it is to fluctuating interest rates.
Michigan CLASS senior portfolio managers have significant experience managing portfolios in rising rate environments dating back to 1994 when rates unexpectedly rose approximately 300 basis points in just one year and then again by 425 basis points from 2004-2006 which is the last time the Federal Reserve tightened the Fed Funds rate (Source: Business Insider). As interest rates rise, the Michigan CLASS portfolio managers seek to reduce risk by shortening the WAM of the fund and increasing the allocation to securities that perform well in a rising rate environment such as floating rate government bonds and commercial paper. In addition, Michigan CLASS uses a Sensitivity Matrix (stress test) which monitors each portfolio’s net asset value when interest rates rise or when large Participant redemptions are requested. By modeling different ‘what if’ scenarios, the portfolio managers can prepare for a variety of situations, while always keeping to our primary objectives of safety, liquidity, convenience, and competitive returns.
Public Trust Advisors (Public Trust) Can Help
While local government investment pools (LGIP) are poised to outperform in a rising interest rate environment, the team at Public Trust (the Michigan CLASS investment advisor) recommends a longer-term focus on all of your investments based on the results of a comprehensive cash-flow analysis. In addition to the cash management provided via Michigan CLASS, Public Trust offers comprehensive investment management services on longer duration strategies. These investment solutions (or separately managed accounts) are a terrific complement to an LGIP like Michigan CLASS due to the nature of their respective maturity structures. By maintaining diversity in the duration of your investments, you are able to better protect your overall portfolio from interest rate risk.
To learn more about the advantages of diversifying your investments with the help of the Public Trust Advisors professional investment management team, please contact us at (855) 395-3954, info@publictrustadvisors.com, or visit us at www.publictrustadvisors.com.
